Downtown office market struggling

Updated 3:30 pm, Tuesday, April 9, 2013

Photo: Express-News File Photos

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HVHC Inc. and Argo Group have leased space in IBC Centre on Houston Street, which once housed AT&T headquarters. The city has given each company 10-year parking subsidies worth about $2.9 million each to facilitate the moves to downtown. less

HVHC Inc. and Argo Group have leased space in IBC Centre on Houston Street, which once housed AT&T headquarters. The city has given each company 10-year parking subsidies worth about $2.9 million each to ... more

Photo: Express-News File Photos

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Architecture in San Antonio — San Fernando Cathedral (foreground), the Tower Life building (right) and the Tower of the Americas.

Architecture in San Antonio — San Fernando Cathedral (foreground), the Tower Life building (right) and the Tower of the Americas.

Downtown office market struggling

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San Antonio's downtown office market is a work in progress, and it's struggling.

The center city's dated buildings, limited parking and the short line-up of major employers have softened the market to a point it hasn't seen since the early 1990s, just before Southwestern Bell moved from St. Louis, to downtown San Antonio.

Currently, about one-third of downtown office space is vacant — despite cheaper average rental rates compared to the rest of the city.

Of course, the Alamo City isn't alone. Across the nation, cities are struggling to fill downtown offices as companies flee for the suburbs. Downtown Dallas, for example, has nearly 27 million square feet of available office space, which is almost equal to San Antonio's entire office inventory. There, the vacancy rate is more than 27 percent, according to a market analysis by Stream Realty, a commercial real estate firm.

In an effort to fill empty space downtown, the city of San Antonio has doled out incentives to companies willing to relocate to the urban core. But only a handful of companies have taken the bait — at least compared to the number developers who've tapped incentives for downtown multifamily projects over the past few years.

Public dollars, combined with a growing demand to live downtown, have fueled the construction of mixed-use and residential developments around the center city.

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But that could be a positive sign for those who want to see more employers downtown. Real estate experts say residential growth around downtown could help rejuvenate the urban core's office market, as employees prefer to live close to their workplaces.

In combination with hangouts, public spaces and other amenities, the area could become more attractive to businesses and growing industries.

“We're creating the urban spaces where the entrepreneurs of today and tomorrow want to be,” said Randy Smith, president of Weston Urban, a real estate investment firm backed by Rackspace Hosting Chairman Graham Weston. “Is (downtown) the most attractive place to live and work right now? No, of course not. But there is definitely a swelling tide that we think resonates with entrepreneurs and businesses.”

Empty Space

Currently, the vacancy rate for downtown office space is 33.3 percent. That's an 8 percentage point jump compared to the previous year, according to data from commercial real estate firm NAI REOC San Antonio, and 13 percentage points higher than the citywide average.

To be sure, there have been small gains, with companies such as HVHC Inc. and Argo Group leasing space at the IBC Centre, AT&T's former headquarters. To land those deals, the city offered each company 10-year parking subsidies worth about $2.9 million each.

HVHC also plans to expand its footprint at IBC Centre by adding 150 employees, bringing the total to about 500. The expansion would require HVHC, the holding company for the eyewear firm that owns Visionworks of America, to occupy another two floors there.

But other space the telecommunications giant once occupied still remains empty — namely the two buildings at McCullough Avenue, near North St. Mary's Street, that left about 430,000 square feet of space on the market when vacated last year.

AT&T aside, office buildings offering less than Class A space have endured the most pain.

Class B and Class C space downtown has posted vacancy rates of 44 percent and 42.3 percent, respectively. On average their rental rates are about $8 per square foot less than the city average, NAI REOC data shows.

“The downtown San Antonio office market is tough,” said Ernest Brown, executive vice president at Newmark Grubb Knight Frank, a commercial real estate firm. “Right now, the biggest hurt for downtown is what reason is there to be downtown versus the suburbs?”

Outside downtown, business has been steady. The abundance of affordable land has allowed companies such as Kinetic Concepts Inc. and NuStar Energy to construct new buildings for their headquarters. And more is on the way. Frost Bank, which recently sold the historic Rand Building downtown where it houses about 300 of its employees, has plans for an office building in Westover Hills.

Downtown, the youngest office buildings were built in the 1980s, and property owners need to continuously update their facilities to stay competitive.

In the suburbs, the office buildings generally are newer and come with up-to-date amenities and abundant parking. Newer office buildings outside of the center city provide on average about five parking spaces for every 1,000 employees. Downtown, the best parking ratio is about three parking spots per 1,000 employees, said Seth Prescott, a vice president at Stream Realty.

Despite the higher lease prices, another advantage the suburbs have over downtown is the proximity to housing and ease of access.

“Even if space costs more in the suburbs, it's easier to get to. It's easier to get in and out, easier access. And on top of that, your employees or (the company) doesn't have to pay for parking.”

Downtown's driver

Currently, downtown's biggest industry is tourism and that doesn't really help the office market, Prescott said. But downtown's robust Internet and electrical infrastructure makes it appealing for technology companies.

Last year, IT services firm Sigma Solutions announced its move to a building along Soledad St. The city approved a $500,000 grant for the company's relocation.

Weston Urban recently closed on a deal for the Rand Building and Geekdom, a technology co-working incubator, will move in at the end of this year. Currently, the organization has more than 500 members and has launched educational programs that reach out to hundreds more. Randy Smith said the Rand Building will be the nucleus for a technology campus in planning on the western fringe of downtown. As the influx of tech geeks continues, Smith said that the technology sector could become the anchor industry for the city's core.

“In our neighborhood downtown, we think with the things going on, that downtown is the place for tech startups,” Smith said. “It's merely a numbers game, where a seedling turns into a sapling and one of those saplings will turn into a mighty oak.”

With thousands of apartment units coming online, a flood of residents also could help fill office space, Ernest Brown said. He sees the residential growth at and around the Pearl as the biggest potential boost to the downtown market.

“The revitalization of downtown is underway,” he said. “How long is it going to take to spill over into the downtown office market? It's coming but you're looking at a 10 to 20 year process.”